General Benefits:
- You pay no taxes on the account's earnings.
- The child doesn't have control of or access to the account -- you do.
- If the child doesn't want to go to college, you can roll the account over to another family member.
- Anyone can contribute to the account.
- There are no income limitations that might make you ineligible for an account.
- Most states have no age limit for when the money has to be used.
- If the child gets a scholarship, any unused money can be withdrawn without paying any penalty (just the tax).
- One option lets you prepay tuition at a qualified educational institution at today's tuition rates (see below).
- Another option lets you save money in a tax-deferred account (earnings only) to be used to pay for education at future tuition rates.
Income Eligability:
- Did you know that with an ESA, you aren't eligible to contribute if you make more than $110,000 per year ($220,000 for married couples)? Unlike ESAs, your income does not affect your eligibility to open a 529 account.
- Contributions to 529 plans also qualify for the $11,000 ($22,000 for married couples in 2002) annual gift tax exclusion. You can also contribute up to five years of gifts during the first year, meaning you can put in up to $55,000 ($110,000 for married couples). This is a great benefit in situations where inheritance money enters the picture.
- Your account can grow up to $268,000 in some states.
- You can contribute as little as $25 to $50 per month.
How can the money be used:
- In most states, there is no age limit or time limit for when the money has to be used. Your child can put off college indefinitely, in which case you have the option of rolling the account over to another child as long as that child is in the same family of the first beneficiary. In case you're wondering just who is considered "family," the plan defines family members as "the original beneficiary's spouse, children, sisters, brothers, nephews, nieces, first cousins, and any spouses of those persons."
- Your child can go to any accredited degree-granting educational institution, whether it is public, private, two-year, or four-year. There are even some international schools that qualify.
- In most states, qualified education costs include tuition, books, room, board, transportation.
- In the event that your child gets a scholarship, then the remainder of the 529 account can be rolled over to another sibling (or relative), or it can be cashed out with no penalty other than the tax paid (at your rate) on the earnings. The same rule applies in the event of the child's death or disability.
Investment Control:
- The state doesn't control your money. Most states are using well-known, successful investment companies such as Tiaa-CREF, Vanguard and Fidelity. The number and types of investment options vary by state, and once you select your option you can't change it. You can, however, roll your money over into another state's plan if you're not happy with your chosen investment option. There is no penalty to roll the money over into another state's plan, and you can do it once every 12 months. Most states have no residence requirement for their 529 plans.
- Many plans are also offering investment choices that are age-based. This means that if you're starting early, perhaps when your child is age one to three, the investments can begin aggressively in stocks then gradually shift to bonds and money market accounts as your child gets closer to college age. Some state plans offer several levels of options for aggressive, moderate and conservative investments.
- If you can't reach the risk level you want in one plan, you can always open a second 529 account in the same or another state. You can have as many accounts as you want and can also contribute to both a 529 plan and an ESA. That way, you can diversify your investments in the event that the plan doesn't offer the investment mix you would like.
- Unlike custodial accounts or Education Savings Accounts (ESAs, formerly Education IRAs), the beneficiary does not gain control of the money at a specific age (usually 18 or 21 for those types of accounts). The account owner always has control of the money. This helps lessen that parental anxiety that Junior will take the money and tour Europe or buy a Porsche instead of going to college.
- There are no restrictions on who can open an account for whom. You can open an account for your child, a friend's child, a relative, the paper boy, or even yourself.
- Anyone can contribute to the account. Now all (or at least some) of that birthday money from Grandma and Grandpa that's usually blown on candy and soon-forgotten toys can be funneled into the college savings account!
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